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♪ [music] ♪

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- [Alex] In our previous videos, 
we explained the benefits of trade.

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Today we're going to evaluate 
some of the arguments

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that one often hears 
about limiting international trade.

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International trade is 
a controversial subject.

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There are a lot of arguments
surrounding it.

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We're not going to go through all 
of them by any means.

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But here are some 
of the most common:

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That trade reduces the number 
of jobs in the United States.

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That it's wrong to trade 
with countries that use child labor.

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That we need to keep certain jobs 
at home for national security.

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We need to keep certain 
key industries at home

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because of beneficial spillovers 
onto other sectors of the economy.

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And we can increase 
U.S. well-being, the argument goes,

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with strategic trade protectionism.

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So we're going to evaluate, say,

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a few things about each one 
of these arguments.

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Let's consider trade and jobs.

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What happens when 
a tariff is lowered?

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Well, imports will increase, 
and there will be fewer jobs

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in the import competing industry.

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For example, if we have a tariff
on shoes and we reduce the tariff,

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we'll have imports of more shoes 
from China and from Vietnam,

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and that will mean fewer jobs

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in the American 
shoe-producing industry.

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That's what people see when 
they think about reducing a tariff.

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They're worried about losing those 
jobs in the American industry.

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However, we want to see 
the issue in a deeper way,

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in a more fundamental way,
and a key question to ask is,

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"Why do people send us goods? 
Why would workers in China,

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in Vietnam, work long hours 
to send us shoes?"

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It's certainly not from 
the kindness of their heart.

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Ultimately, they want goods 
in return, goods or services.

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They are working -- they are 
producing in order to consume

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goods because they want 
goods in return.

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They are not doing it out 
of the goodness of their heart,

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but out of self-interest
as Adam Smith said.

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And that leads to a fundamental 
insight about international trade.

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Namely, we pay 
for our imports with exports.

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When we import more, 
we will ultimately export more

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because we pay for our imports 
through our exports.

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What this means is that trade 
doesn't destroy jobs overall.

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Trade moves jobs 
from import-competing industries

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to export industries, and overall, 
wages increase on average

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because of comparative advantage.

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Because we pay 
for our imports with exports,

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when we import more, 
we will export more.

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[ ] import-competing industries 
and increase

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in the export industries.

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Now, this process is 
not always easy.

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Problems can occur when we lose
jobs in low-skill import-competing

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sectors and gain jobs 
in high-skill export sectors.

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Overall, when the United States 
imports goods, we typically

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import goods produced by low-skill,
because America on average

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is a high-skill economy, 
has high-skilled workers

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on a world level, but we do have
some low-skill workers,

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and imports tend to compete 
with the products

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produced by low-skilled workers.

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Everything will be fine 
if our education system is

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working well, and if those 
low-skill workers can increase

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their skills and move to high-tech,

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or high-skill, not necessarily 
high-tech, high-skill sectors.

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Of course, that's a big "if" 
and the transition can be difficult.

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We have to put this 
in context, however.

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In a growing economy, jobs are 
appearing and disappearing

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all the time, not just 
or even fundamentally because

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of international trade, 
but because of changes

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in preferences 
and changes in technology.

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Let's take a look at that. 
It's important when thinking

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about trade and jobs 
and jobs in general

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that the American economy succeeds 
precisely because jobs are being

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created and destroyed 
all the time.

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Job destruction is often a sign 
of progress and growth.

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Think about Thomas Edison.

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He destroyed the whaling industry 
with his invention of the light bulb.

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CDs -- some of you may not even 
remember Compact Discs --

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they destroyed jobs 
in the record industry.

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MP3s destroyed jobs 
in the CD industry.

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This is the way progress 
often occurs.

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Employment and the standard 
of living overall keep rising

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over time, and the reason they're 
rising is precisely that old jobs

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are being destroyed, 
new jobs are being created.

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Overall, in the churn
there's a trend towards richer jobs,

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higher-paying jobs, higher wages.

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Overall technology, trade, 
these benefit the U.S. economy.

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Child labor is something 
which no one wants,

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but it's important to understand
that child labor is something

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which happens when people are poor.

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[ ] and the United States.

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Child labor declined 
in the developed world

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as people got richer.

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Forces that reduced child labor 
in the developed world are also

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at work in the developing countries.

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As countries become richer, 
child labor declines.

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What this graph shows is that 
as real GDP per capita increases,

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the percent of children ages 10 
to 14 in the labor force decreases.

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So increases in real GDP reduce

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the percent of children 
in the labor force.

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The circles, by the way, are 
proportional to the absolute number

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of children in the labor force, 
so in China, for example,

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there are about 12 percent 
of kids in the labor force,

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but because there are so many 
Chinese children, that's

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a large number of children 
in absolute numbers.

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Again the key here is really

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that economic growth 
reduces child labor.

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[ ] to become rich.

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The question is, "Can one 
accelerate this process by banning

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child labor or by refusing to trade 
with countries that use child labor?"

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That's really refusing to trade 
with the poorest of countries.

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Do we really want to do that?

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Do we really want 
to say to poor countries,

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"We're not going to trade with you."

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There are many opportunities 
here for unintended consequences

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of laws which may have been, tried 
to do a good thing, but backfire.

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So, for example, when India
banned child labor,

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one of the effects of that was 
to reduce the wages of children

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because now you have 
to hire them under the table.

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Because their wages were lower,
the families were poorer, and because the

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families were poorer, they had to rely
even more on child labor. So it is very

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easy to create a policy which backfires.
It is not, in my view, a good idea to use

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international trade as a weapon or as a
tool against child labor.

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A much better idea would be to help poor
countries, would be to offer free

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schooling in poor countries, to offer
lunches for schools in poor countries.

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This increases the incentive to send the
children to school because then they are

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fed. So there are lots of things we can do
to reduce child labor in poorer countries,

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but to say to those countries, "We're not
going to trade with you because you're

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poor and you're using child labor," just
exactly the same way we did in the 19th

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century, that is really not in my view a
productive policy.

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Trade and national security. Yeah, some
industries probably should be protected to

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protect national security. The problem is
this argument is subject to great abuse.

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Almost every industry can and does make
the claim that they're essential for

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national security. So let's give some
examples. Vaccine production? Yes,

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probably a good idea for us to have some
domestic capability. We don't always want

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to buy our vaccines from abroad, just in
case. Angora goat fleece? Am I serious?

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Yes. Believe it or not, we have protected
Angora goats with the argument that their

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fleece is necessary to produce military
uniforms. Yep, some people think goats are

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vital to national security. I'm not
kidding.

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The key industries argument is very
popular among the high-tech crowd. The

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argument is, is that there are some
industries which for a variety of reasons

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are especially important for a nation to
have a foothold in. "Biology, microbiology

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is going to be the future, therefore we
need to have this type of industry." Or,

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'Computers are the future, therefore we
need to have this type of industry." The

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argument is that these industries create
spillovers for other industries. They

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create learning, they create research,
they create workers, high-tech workers,

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which spread out to other areas of the
economy and benefit the economy in ways

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which go beyond the GDP produced by those
particular industries.

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Ross Perot famously made this argument
when he said, "Producing computer chips is

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better than potato chips."
In some ways this may be true, but it's

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overall not a compelling argument. For
example, today most computer chips are

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cheap, mass-produced products. They're not
something we really want to be producing

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at all. They're not even produced with a
lot of labor. They're mostly produced in

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big factories which don't actually make a
lot of money. Much better to design the

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product the way Apple does, making lots of
profit, than to buy the chips which Apple

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uses in its iPhones, which don't make a lot
of money at all.

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In 1990, Walmart contributed more to the
boom in productivity than Silicon Valley.

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So it's always difficult to say exactly
which are the most important industries.

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You wouldn't think that Walmart retail is
a hugely important industry, and yet,

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Walmart is the world's largest firm and it
has done a huge amount to make the

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American economy more productive. So no
one really knows which industries are the

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ones with the really important spillovers,
and when we add in political economy, the

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tendency for politics to often choose
based upon the wrong reasons, this

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argument is really not very compelling.
Here's an argument which again works in

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theory but is less likely to work in
practice. It's possible for a country to

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use tariffs and quotas to get a larger
share of the gains from trade. The

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argument here is that if you can limit or
tax exports, not tax imports, but tax

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exports, then you can let domestic firms
act as a cartel, so it's a way of helping

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domestic firms to be more like a monopoly,
to act like a cartel. So the government

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plus the domestic firms put, creates a
tax, or limits exports in order to raise

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the price of those exports on world
markets and in order to grab up more of

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the gains from trade.

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It can work, especially if there are few
substitutes for US-produced goods. On the

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other hand, if there are substitutes for
US-produced goods or if we push the price

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of our goods up too high, and that creates
the substitutes, we may in the long run

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really reduce our market. Moreover, these
arguments for strategic trade

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protectionism are not such a great idea if
other countries can retaliate. If every

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country tries to do this, then world trade
as a whole will shrink and no country will

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be better off. So in trying to grab up a
larger slice of the pie, we have to always

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be worried about making the pie smaller.
Again, the argument works in theory. A

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very clever government might be able to do
it, but in practice, this is really not a

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very good reason for limiting trade.
So to sum up, restrictions on trade waste

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resources by transferring production from
low-cost foreign producers to high-cost

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domestic producers. Restrictions on trade
also prevent domestic consumers from

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exploiting all of the gains from trade.
There are some good arguments for

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restricting trade. Some arguments are
valid, but they're usually of limited

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applicability. Overall, I think free trade
is a robust policy in the sense that it's a

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policy which works well in most
circumstances and protectionism will work

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well only in a limited number of
circumstances.

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Thanks!

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- [male] If you want to test yourself,
click Practice Questions. Or, if you're

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ready move on, just click Next Video.

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♪ [music] ♪